TR Monitor

Has the exchange rate stabilized?


EIt looks relatively stable. However, because net reserves are still negative all the swap money and other hard-earned foreign currencies are being used up one way or another to anchor the Lira.

E Meanwhile budget dynamics are deteriorat­ing. The eventual burden of the exchange rate-protected TL deposit scheme is unknown. Either it will help stabilize the currency by slowing down dollarizat­ion and transfer the burden to the budget or it won’t work.

E In order to work, the Lira should depreciate. Ironic isn’t it? Unless the Lira depreciate­s –theoretica­lly the depreciati­on should be equal to the inflation differenti­al between Turkey and its trading partners – there will be no reason left to prefer this kind of TL deposit over other financial instrument­s.

E So far there is equilibriu­m. Investors have found what they were looking for in Q1. This is because the Lira depreciate­d. Otherwise, the 17% annual interest doesn’t mean much. Had people preferred TL assets they wouldn’t have opened FX accounts in the first place, would they?

E Now that a new Credit Guarantee Fundlike scheme is in the making, what will happen to the current account, to inflation and to the exchange rate? It all depends on what the exporters who can access TL 150 billion at 9% annual interest – so cheap – will do with that money.

E If they spend it on luxuries or if they dollarize further, then exchange rate stability will be hampered. If they invest in machinery & equipment, it will help.

E In 2017, the Credit Guarantee Fund played a huge role, which caused 123% increase in commercial and SME credits channelled through that device. Even so, the loan-to-deposit ratio for TL credit reached 150% and TL deposit rates went up as a result. Now we don’t see those kinds of price balancing moves.

E At that time, loan rates also went up and with the help of dividends, the banking sector performed well. Today rates aren’t going up, but banks are being funded at 14% anyway.

E At such low interest rates the current scheme is a direct transfer from the budget to exporters. It is a risky business. It can pay off politicall­y but the economic outcome is uncertain.

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